Morningstar picks its multi-sector favourites

Investment researcher Morningstar has released its latest review of multi-sector funds, awarding eight ‘gold’ ratings and 11 ‘silver’, concluding that they are a useful way for some investors to manage risk.

An investor’s portfolio should reflect their risk tolerance and investment objectives, Morningstar says. “That said, opportunities often appear in markets and shrewd investors can profit from tactically tilting their portfolios at opportune moments.”

It says investors who benefit most from an allocation to flexible strategies are those in late accumulation or in decumulation – that is, those most sensitive to sequencing risk. “At this stage of the investor’s journey, sequencing risk does become an issue and protection from severe drawdowns can be highly beneficial.”

Flexible multi-sector funds have multiplied since the GFC, reflecting a greater investor focus on risk. “They emerged as a response to the poor performance of many static asset allocation funds during that period,” Morningstar says.

These funds tend to set return targets in terms of a percentage above inflation or cash, such as CPI plus 4 per cent or the cash rate plus 5 per cent. Morningstar says the returns are close to the long-term return of equities but not quite as high.

“A flexible strategy is unlikely to be the most high-returning asset in your portfolio over the long run but would be useful as a diversifier,” it says.

In its review, Morningstar did not make any upgrades or downgrades but it added 17 funds to its coverage. Among those funds, four Vanguard diversified ETFs were rated ‘gold’ and four Sunsuper funds were rated ‘silver’.

Morningstar says the Vanguard funds avoid tactical decisions “but it doesn’t sit idle in asset allocation, as its move to lower home country bias in 2017 attests. This multi-sector suite is an outstanding choice for investors.”